Hotels Improving Profit Margin, Consultants Say

While the turnaround in unit-level profitability is certainly welcome news to the hospitality industry, the average hotel in the 2005 edition of PKF's Trends in the Hotel Industry is "just barely achieving the same bottom line dollars they did back in 1996," says R. Mark Woodworth, executive managing director of PKF-HR.

"It is important to know that hotels currently are quite profitable," Woodworth says in a prepared statement. "However, it may not be until 2006 or 2007 that the average US hotel will match the profit margins and dollars achieved in the late 1990s."

The PKF executive says "looking at historical 'financial recovery' patterns for the lodging industry, the strongest gains in profits usually begin to occur in the third of fourth year of recovery." PKF projects profit growth of 14% to 16% for 2005.

Woodworth notes "industry-wide profits started to improve in 2003, but the greater number of hotels in operation influences this statistic." He suggests "changes in unit-level profits are much more meaningful for hotel owners, operators, investors and lenders." He adds, "Understanding unit-level changes in hotel profitability is critical to measuring management efficiency, incentive management fees, changes in values, return on investment, debt coverage and industry solvency."

By categories, resort properties showed unit-level changes from 2003 of 9% in total revenue and 17.2% in operating profit, according to PKF data. Convention hotels were up 8.4% in total revenue and 11.7% in operating profit. Suite hotels increased total revenue by 6.3% and operating profit by 10.8%. Full-service hotels posted a 6.8% change in total revenue and 10.5% in operating profit. Limited-service hotels had a 5.8% change in revenue and 6.2% change in operating profit.

PKF defines operating profit as a percentage or amount before deductions for capital reserve, rent, interest, income taxes, depreciation and amortization.

The industry's performance in 2004, based on unit-level dollars per available room, show resort hotels posting $86,640 in total revenue, $20,689 in operating profit for a profit margin of 23.9%. Convention hotels had revenue of $59,549, an operating profit of $15,305 for a profit margin of 25.7%.

Full-service hotels had revenue of $40,371, operating profit of $8,842 for a profit margin of 21.9%. Suite hotels showed $27,220 in total revenue, $8,764 in operating profit for a profit margin of 32.2%. Limited-service hotels had total revenue of $15,830, operating profit of $5,311 for a profit margin of 33.6%.